MYNEWS (5275.KL) - Not What You'd Expect From A Convenience Store
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EDIT (29.05.22):
A kind reader pointed out how there was a huge hole in this MYNEWS investment thesis. Namely, I did not account for how post-FY19, the IFRS 16 Leases accounting standards change led to their store rental expenses being accounted for as ROUA Depreciation going forward. This has two main implications:
Their improving unit EBITDA trend post-FY19 no longer represents an apples-to-apples comparison vs. pre-FY19. The correct profit trend to observe is their unit Net Profit trend, which saw a decline in the pre-pandemic period.
Their business being consistently OCF-positive throughout the pandemic period of FY20-21 is no longer a true reflection of their OCF health - as we also need to deduct their lease obligation cash outflows (i.e. Financing Cash Flows) from OCF as well.
This means that the core thesis has been violated, and therefore the entire investment thesis as described here is completely bunk. One silver lining is that everything as described here except the core thesis remains intact, e.g. the branding power of their new CU stores (yes I know how that sounds). I certainly think that their business still has merit, and this report may still be useful someday in the future. However, it does mean that they are no longer completely mispriced as I initially thought.
I would like to sincerely apologize for any inconvenience this report has caused - and to be completely honest, I cannot guarantee that I will not make such mistakes again (I actually made a similar mistake before with Supermax). But what I can promise is to provide full accountability as soon as I’m aware of them, so that you can decide for yourself what the best next course of action is.
Once again, please accept my apologies. Also, a big thank you to JL for bringing this to my attention.
EDIT (31.05.22):
In the past few days, I got around to discussing MYNEWS again with someone who was much more familiar with them. While my original thesis of their improving unit EBITDA trend certainly remains incorrect, there actually remains another possible bullish argument for their shares at today’s share price of around RM 0.62. Namely, prior to the pandemic, their Net Profit from their legacy MYNEWS stores alone was approximately RM 25M. With the introduction of their new CU store lineup with much stronger branding, it is genuinely not difficult to imagine them one day doubling LT Group earnings to RM 50M - even if we conservatively assume declining unit store performance going forward. And at their current market cap of around RM 420M, that’s an implied forward PE of 8.4x. Given their relatively predictable CVS business model, I’d say the risk involved is extremely tolerable given their current valuations. Notably, their direct competitor FamilyMart Malaysia just posted FY22 PBT of RM42M with only 300 stores so far (see screenshot below):
MYNEWS is a convenience store business with a relatively simply business model. They’re bringing in a much more well-recognized Korean CU brand to complement their existing CVS lineup.
The potential TAM for CU stores (61 stores) is huge! Here’s the store count of its closest competitors: MYNEWS (500 stores), FamilyMart (300 stores), 7-11 (2,400 stores). And given the simple CVS business model, there is relatively little operating risk - on top of the power of Branded Retail from CU.
If you simply observe their headline performance, their numbers are quite frankly uninteresting… until you adjust for like-for-like unit performance. The results are truly shocking! (I’m not being a drama queen)
Despite being in the B&M Retail industry, MYNEWS stores in aggregate were OCF-positive in all but one quarter throughout the pandemic period of FY20-21. If they can sustain their pre-covid operating performance and supercharge it with the CU brand, it’s not difficult imagining them following in the footsteps of the very successful FamilyMart Malaysia (see 5-yr share price chart).
MYNEWS’s share price has fallen by about -50% from their pre-pandemic levels… when they didn’t have their branded CU stores yet. Now that CU is finally kicking into gear, does that imply at least +200% upside for MYNEWS shareholders?
When I first started researching this convenience store (CVS) business - I’ll be honest, I wasn’t expecting much. However, it actually ended up being one of the more enjoyable companies that I’ve researched thus far - with so many hidden surprises, that I ended up redoing my research multiple times over. By the time you’re done reading this report, I hope you’ll feel the same way too.
If you’ve read my earlier BJCORP Part 2 report, you’ll recall that I mentioned how one of their listed subsidiaries BJFOOD was the Malaysian franchisee of Starbucks - and how Starbucks represents nearly all of the Group’s Net Profit. For illustration’s sake, you can imagine the future of MYNEWS as being of a somewhat similar profile - except rather than Starbucks, it’s the Malaysian franchisee of the Korean convenience store CU. Below are videos taken by vloggers of both CU Malaysia and CU Korea - as well as my own shakycam attempt of one of the former’s stores in a local mall:
In recent years, the concept of convenience stores has evolved beyond simply being a glorified grocery mart with commonplace SKUs and 24/7 opening hours - the CVS gold standard is a Japanese 7-11 or FamilyMart store, where you can find almost anything imaginable (e.g. packaged snacks, prepaid reload cards, refrigerated canned beverages, newspapers, spirits, sushi, fresh food, disposable clothing). The vision is to justify higher prices than those found at your bargain bin grocery mart by selling consumers an experience rather than a product - with the experience in question being “convenience”. Whether that means emergency disposable underwear or a last-minute flower, they’ve got your back - and you’ll happily pay for the privilege.
QL’s average PE ratio was 50x since they launched FamilyMart (source: TIKR) - see one of their FamilyMart Malaysia store below:
This brings us to MYNEWS, another listed convenience store (CVS) chain in Malaysia. As the company’s name suggests, MYNEWS is the name of their CVS convenience store chain. The video above shows you what a typical MYNEWS store looks like - they’re not much different from a typical 7-11 store in either the USA or Malaysia.
What separates the “men” CVS stores from the “boys” CVS stores is the kitchenette - which the industry describes as “Ready-To-Eat” (RTE). If you scroll back up to the first CU video above, you’ll notice that they’re serving piping hot fresh food which is cooked by staff on the spot behind the counter - these were the main draw of local FamilyMarts here when they first opened. You can basically think of them as filling a hybridized niche between McDonald’s and Starbucks QSR-style fast food with the associated price points - they are surprisingly popular with office folk.
As the F&B sector tends to have Gross Margins of ~70% vs. the FMCG packaged food sector’s Gross Margins of ~30%, this gives the convenience store P&L a new lease on life - as they’re no longer just renting shelf space to 3rd party suppliers and acting as a middleman. And since serving fresh food in a CVS format requires setting up a capital-intensive central kitchen to supply hundreds of stores, this business model shift also represents vertical integration and increased operating leverage.
What CU offers to consumers that MYNEWS didn’t in the past is mainly two new things: 1) RTE and 2) Branding. As we’ve seen with QL’s success, the introduction of FamilyMart was a big hit in Malaysia due to the refreshing RTE concept - but arguably moreso due to FamilyMart’s incredibly established global brand (2nd largest CVS chain in the world after 7-11).
As I’ve explained in my previous Innature article, the key success factor in the Retail industry boils down to Branding - and Branded Retail is perhaps one of the most powerful business models in the world (e.g. due to pricing power). While the Korean CU brand is nowhere close to being as widespread as FamilyMart’s, it still carries some heft - anecdotally, I remember witnessing long lines outside CU’s first local store here for about a month after they opened.
That’s pretty much it for the business model of the “new and improved” CVS format - unlike many of the businesses we’ve covered previously, there’s nothing arcane about the CVS business model. In the report below, we will be exploring their operating metrics in order to discern what their historical performance looks like - and what those might spell for their potential future performance. We’ll also explore their business environment, competitive landscape and estimate their industry TAM.
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MYNEWS stores vs. CU stores
MYNEWS has been around in the CVS business for over 25 years - but as I’ve alluded to above, there’s not much that differentiates their legacy MYNEWS-brand convenience stores from the average CVS elsewhere around the world. Here’s a useful snapshot taken from p.14 of their FY21 Annual Report:
p.14 of MYNEWS FY21 annual report
We’ll dive into analyzing their operating performance later, but there’s some stuff about them which I think is worth pointing out now. From their latest FY21 store count of 542 stores, only 21 of them are CU stores. This is because CU is still a relatively new venture for the company, with their first CU store only having opened in April 2021. However, they also revealed in their latest 1Q22 quarterly report that this figure has since increased to 61 CU stores by 31 Jan 2022:
As we’ve noted above, the bulk of MYNEWS Bhd’s (the listed company, not the CVS chain) valuation will be derived from the future rollout of their new Korean CU chain - rather than from its legacy MYNEWS lineup. Thus, it’s quite encouraging to see that they’re already starting to move on from the pause introduced by the lockdown environment of the pandemic, which we’ll discuss in more detail below.
If you’re eagle-eyed, you’ll notice from the screenshot above that they’ve been facing some pretty severe Net Losses over both FY20 and FY21. While one might be tempted to blame this on declining sales in the pandemic environment, that’s actually only half of the story. As we can see from the screenshot below, their Sales per store only fell by about -25% from their FY19 peak - which all things considered, is not too bad for a B&M Retail business.
The other contributing factor to their large Net Losses in those two years was due to the fact that they were also waist-deep in the buildout of the aforementioned central kitchen (which they refer to as ‘Food Processing Center’, or ‘FPC’) for their new CU chain. You can see below how their Gross Margins haven’t actually been affected by too much; nor have their Inventory Days spiked from their pre-covid levels (e.g. due to inventory obsolescence). However, their Operating Margins did crater into oblivion.
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